This invention concerns financial transactions, and specifically the invention is directed at life settlements (or senior settlements) and viatical settlements (sometimes collectively referred to herein as life settlement transactions), and the creation of an efficient market in such transactions.
With the AIDS epidemic that began in the 1980s, life settlement transactions began to be seen as a useful tool for realizing liquidity from an existing, in-force life insurance policy during the insured's lifetime. AIDS victims facing inevitable and proximate death were offered cash for the transfer of their life insurance policies with beneficiary and ownership rights transferring to the buyer. The buyer would then make remaining premiums (if necessary) until the death of the insured. This provided cash where none would otherwise be available during the lifetime of the insured, but only to a survivor. Viatical settlements refer to insureds with actuarial life expectancy of less than two years. Since the inception of viatical settlements, a new market in the form of senior settlements (or life settlements) has developed for the sale of policies with life expectancies of more than two years. Typically these policies insure seniors over the age of 65 or perhaps younger if the insured has health issues. Generally speaking, investors are looking for policies where the insured's life expectancy is less than 15 years. A growing market has arisen for the purchase and sale of life insurance policies in such life settlement transactions.
However, both viatical and life settlement markets have been essentially unregulated, and unconscionable commissions and profits have been gleaned from many life settlement and viatical settlement transactions. Many feel this to be the case in the majority of such transactions. In nearly all cases the policy owner selling a policy is not made aware of the actual price for which the policy is purchased, but only knows the amount he is paid. Brokers specializing in the purchase of life policies, usually on behalf of investors such as large insurance companies, pension funds, etc., take a very large percentage of the purchase price, often over 30%. In almost all cases there are other levels involved, such as agents who themselves take hefty commissions. The result is that the owner of the policy, usually the insured, receives a greatly reduced portion of the true value of the policy, perhaps only 50% to 60% of the true value. Normally the owner/insured has no idea of the true value of the policy. Because of the inconsistency in life insurance medical underwriting, the owner (insured) is often only given enough of the proceeds to pacify him. Often the agent will then show the client how to take the proceeds and purchase either more insurance or the same amount of the coverage at a lower annual premium.
Changes have been occurring in the insurance industry, particularly in the United States. Life expectancy has increased considerably in recently decades, and rates for life insurance, particularly term insurance, have dropped a great deal. Additionally, insurance companies price their policies with the idea that 5 out of 6 of them will lapse and never pay a death benefit. This has the effect of driving down the cost of policies due to the retained earnings of paying less in claims. As a result, an insured holding an older policy (usually permanent insurance, i.e. a “whole life”, or “universal life” policy) often finds that he can obtain life insurance with a far higher death benefit than under his current insurance, by purchasing a new policy, without any increase in the premium being paid, or potentially a substantial decrease. This situation presents a strong incentive for an insured to enter into a life settlement transaction, selling the existing policy and realizing a fairly large sum of money, which can then be used to buy a permanent insurance policy with a far higher death benefit. The insured can also use the proceeds for other purposes.
This situation has caused a continually growing market in life settlement transactions. However, and unfortunately, the very large profits taken by brokers in these transactions has deprived policy owners of a fair value for the sale of their policies, and has actually had a negative effect on the organized entry into this market by large and reputable insurance companies. Being unregulated and having a reputation as being run by profiteers, the market has caused many influential and potentially beneficial buyers to shy away because of potential trouble and damage to reputation.
Accordingly, there has been a need for an efficient market for life settlement and viatical settlement transactions, a market which policy owners can enter with a fair degree of confidence that they will be obtaining a good and competitive value for their policies, and consequently, a market where buyers of policies can avoid over-paying for policies only to benefit the layers of profiteers that stand between them and the seller.